Working Paper: NBER ID: w1912
Authors: Irving B. Kravis; Robert E. Lipsey
Abstract: This paper attempts to find norms for long-run national price levels,and therefore, by implication, for exchange rates, that are superior to those implied by the absolute or relative versions of purchasing power parity theory. The structural variables we have found to determine these price levels, real income per capita, the openness of the economy, and the share of tradables in total output, are used to explain price levels in periods since 1960 and to some extent since 1950.The results suggest that there was a movement toward a more "orderly" alignment of price levels, especially in the period before the 1970's. That is,national price levels came to be explained to an increasing degree by our structural variables. The price levels implied by the structural equations appear to come closer to representing long-run equilibrium levels than do those implied by purchasing power parity. The deviations from the structural equations seem to have value inpredicting future changes in price levels or real exchange rates,in conbination with changes in the structural variables. And they also contribute to predicting changes in the balance of trade.
Keywords: National price levels; Purchasing power parity; Exchange rates; Structural variables
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real per capita income (E25) | national price level (E30) |
| openness of the economy (F41) | national price level (E30) |
| share of nontradables in total output (F62) | national price level (E30) |
| openness of the economy interacts with income level (F40) | national price level (E30) |